Every year, as April 15 approaches, a lot of massage therapists find themselves feeling a mixture of dread and panic at the thought of filing their taxes. Fortunately, it really doesn’t have to be that way. With a little organization, planning, and help from the right source, you can be ready for a stress-free tax experience.
Organization is the Key
If you’re one of those people who saves every receipt and warranty card, and has a nice, neat file cabinet filled with carefully labeled folders, you’re already ahead of the game. If you prefer dumping everything into a box or a drawer, you’re still in the game. If you haven’t been saving receipts or been diligent about keeping good financial records, it’s time to revamp your habits to avoid the stress of tax-time disorganization, and ensure you’re taking every allowable expense for your business.
I keep one folder on my desk for unpaid bills; my file cabinet is organized with labeled hanging folders, and inside the hanging folder is a regular file folder for holding the receipts and invoices that have been paid, organized chronologically. On December 31, I just pull out all the file folders, store them in a labeled file box, and replace them with new file folders in my hanging file. It’s an easy system.
Planning Ahead
April 15 has been “tax day” since 1955. You know it’s coming every year, so all it takes is for you to make up your mind to be prepared. Depending on the structure of your business, you may have deadlines to meet throughout the year, not just in April. Self-employed business owners, as well as those who work for someone else as an independent contractor, must pay self-employment tax, also known as quarterly estimated tax, every quarter. Filing dates for quarterly estimated taxes are April 15, June 15, September 15, and January 15 for the final payment of the preceding year.
Paying your quarterly estimated tax is going to save you from the shock of finding out you owe a big tax bill at the end of the year. When taxes aren’t automatically deducted from your paycheck, as they are for employees, it’s easy to forget that all that money doesn’t belong to you.
Seeking Help
The tax-paying public tends to head for the accountant’s or tax preparer’s office as April 15 draws near. In reality, the best time to have an appointment is before you go into business, or the beginning of a new year if you’re already in business. A certified public accountant, or certified financial planner, can give you advice on the best type of business structure to choose for your particular business situation, offer guidance on how much money you should be setting aside for your taxes (and your retirement), clarify what your deductions are according to your employment circumstances, and advise you on getting your budget back on the right track if it has fallen off.
Deduct, Deduct, Deduct!
Most people are aware of the obvious deductions, like advertising, rent, and utilities.
Less obvious deductions shouldn’t be overlooked. Basically, if it’s for your business, it’s a deduction. Taking a lomilomi class in Hawaii? Write it off. Buying music to play during massage? That’s deductible. The business use of your car is tax-deductible; that is especially important to those therapists who do outcalls for a living. And practitioners who work at home definitely need to take advantage of the home office deduction (see Deductions to Consider, page 25).
For complete details on deductions for the self-employed, visit the Internal Revenue Service website and see Publication 535: www.irs.gov/pub/irs-pdf/p535.pdf.
If you are an employee, you may still be entitled to certain tax deductions, as long as they are not expenses that are reimbursed by your employer. For instance, if you’re obligated to pay for your own work uniform, that’s a deduction. However, you must itemize your taxes in order to take advantage of that, and you can only deduct what is in excess of 2 percent of your adjusted gross income.
Expenses You Cannot Deduct
Deductions can be confusing and the IRS has little sympathy for those who abuse them, so proceed with caution. Following are some examples of possible deductions that may suit practitioners.
While uniforms are tax-deductible, clothing that is adaptable to everyday use is not. You might have a hard time convincing the tax auditor that you can’t also wear those khaki pants and polo shirts you wear to work to the bowling alley or the grocery store.
Job-hunting expenses are only deductible when you are seeking to change jobs within the same profession, and cannot be taken when you are looking for your first job, or changing career tracks altogether. In the same vein, a therapist just starting her career may not be able to deduct the cost of taking the exam required for initial licensure, but once in practice, would be able to deduct the cost of an advanced certification. Personal expenses, like gym memberships and nail and hair services, can’t be deducted unless you’re a model or an actor who can prove it’s vital to your career to look good. You can deduct the costs of belonging to a professional membership organization, but you can’t deduct your membership to the local country club. If your business is strictly an outcall business and you document your mileage, that’s a legitimate deduction. However, some folks have had the crazy idea that they can deduct the entire cost of their auto by putting a magnetic business sign on the family car. Wrong. The only thing deductible in that case is the cost of the sign.
Maximizing Your Personal Deductions
If your business is structured so that the income is directly yours, or passed through an entity to you to be reported on your personal tax return, and your deductions fall below the threshold that it would serve you to itemize your tax deductions on your personal return, you’ll just be taking the standard deduction. According to the IRS website, for the tax year 2010 that amount is $5,350 for a single person or a married person filing separately, and $10,700 for a married person filing jointly or with a dependent.
On the other hand, if you have more than one child or other family member who is your dependent, if you’re paying a mortgage, if you have steep medical and dental expenses, casualty and/or losses due to theft, have made substantial contributions to charity, have contributed to your own retirement account, or even bought a new car, you may be better off itemizing your deductions.
There are a lot of available tax credits and outright tax exemptions for certain circumstances, such as for people who have retired, people who have drawn unemployment payments, child care credits, adult education credits, credits for making your home energy efficient, and earned income credits.
If you’re unsure of all the deductions you’re entitled to, this is not the time to be stubborn; pay a tax professional to figure your taxes. I’d be afraid not to. In spite of the fact that I do my own daily bookkeeping for my business and my husband’s business, I feel more secure in turning my taxes over to a knowledgeable professional who is going to be sure I get to keep as much of my money as possible. The deductions and credits she finds for me are worth much more than I pay her to do my tax forms.
Surviving an Audit
Few words strike as much fear into a human being as, “You’ve been chosen for an audit.” Don’t be scared; by definition, an audit is simply an examination of your tax return. According to Jeff Schnepper, a popular columnist on the Microsoft Money Network, the biggest reason people receive a letter from the IRS is because of human error. Most audits are conducted through the mail; it’s highly unlikely the taxman will come knocking at your door unless the IRS thinks you’re running a cartel and laundering money. Schnepper says that every year the IRS mails out more than 1 million letters to taxpayers who fail to sign their tax returns.
In reality, small businesses are much more likely to be audited than big companies, and that applies to service businesses in particular. The assumption is that small service businesses are much more likely to receive cash payments that may go unreported.
You can avoid being audited by checking your numbers and being sure your tax return is free from mistakes (another reason to hire a professional). Don’t ever brag about cheating the IRS—they’ll give whistle-blowers as much as 30 percent of the tax they collect from the deliberately dishonest. Also, make sure your tax return matches your supporting documentation and remember that most audits take place within 18 months of filing. Generally, there is a three-year statute of limitations for the IRS auditing a tax return (so you need to keep your records for at least that long) and a 10-year statute of limitations for the IRS collecting tax. The bottom line, if you are audited, be cooperative.
Remember, the steps to stressing less about taxes and keeping more of your money are simple: get organized, be prepared, and seek the proper help.
Laura Allen is the author of Plain & Simple Guide to Therapeutic Massage and Bodywork Examinations (Lippincott Williams & Wilkins, 2009), One Year to a Successful Massage Therapy Practice (Lippincott Williams & Wilkins, 2008), and A Massage Therapist’s Guide to Business (Lippincott Williams & Wilkins, 2011). Allen is the owner of THERA-SSAGE, a continuing education facility and alternative wellness clinic of more than a dozen practitioners of different disciplines in Rutherfordton, North Carolina. Visit her website at www.thera-ssage.com.